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4 Pressing Topics From The Berkshire Meeting

Jeremy Glaser
Greggory Warren, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Gregg Warren just finished asking his questions of Warren Buffett and Charlie Munger. We're going to talk about some of the big topics that came up.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: Let's talk about Berkshire culture. That came up in a number of different questions today, and there a lot of different facets. Did you learn anything new about how they think about culture during the meeting?

Warren: No, I think they've been pretty clear in the past about how they look at culture, and quite honestly there's an interesting book that came out this past fall by Guy Cunningham at Columbia, specifically on Berkshire's culture and the different cultures at the subsidiaries. We actually had a question queued up that was looking at how they ensure, longer term once Warren and Charlie aren't there, that the culture of the acquired assets gels with the rest of the firm. It's interesting to think about because it is a completely decentralized organization, so you wouldn't think that culture would matter that much. But overall, they do have to have a sort of culture in place that has everybody managing their businesses similarly--this willingness to push capital up to the corporate headquarters to be invested for the long term. So, overall, it was a good set of questions.

Glaser: But you still feel comfortable that the culture will continue after Warren and Charlie are no longer there?

Warren: Yeah, I think they've really established a benchmark. I think that all of the guys who are in the lineup to take over Warren's job once he leaves have been with the firm for a long time. So, they are really imbued with the culture that Berkshire expects.

Glaser: There were a couple of questions in the meetings geared toward what Berkshire will look in a crisis, be it a rail-car accident or a weather event or just another financial crisis. And there were some interesting comments from Warren and Charlie about how things like Dodd-Frank make a financial crisis somewhat more difficult to deal with than it might have been in the past. What's your take on how Berkshire will be able to respond to crises today versus how they did maybe even just a few years ago?

Warren: Well, I think, during the financial crisis, they were sort of the bank of last resort. They really had an opportunity to step in there and offer capital to good companies that were having a difficult time getting access to capital. Warren did make a really valid point: The climate has changed significantly in Washington over the last six years to the point where if we had another crisis you probably wouldn't be able to get a blank check to go out there and do whatever it took to save the economy. It's really a different era. I think that's a lot of the reason why a lot of the regulations have been coming down the pike from the regulators, to ensure that they don't need to jump in in some segments of the market if something does go wrong.

When we think about the insurance stuff, there were some questions about whether or not global warming, over the long run, is going to have an impact. It's sort of highlighted as a risk for a lot of their competitors. The thing is that Berkshire is well overcapitalized on its insurance business, so they can really withstand any big major event in any way. So, it's not as big of a thought. When they look at risk that they are willing to underwrite, they are really looking at whether or not they will be able to cover it if an event does happen. So, overall, there's nothing new there.

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Glaser: You asked a question about the Duracell acquisition--why they are buying a business that's maybe not in terminal decline but is clearly declining. Did their response give you any more insight into how they think about acquisitions?

Warren: In light of what happened, it was really a tax-effective deal for both Berkshire and for Procter & Gamble. Berkshire had an extremely low cost basis on the Procter & Gamble shares that it held, going back to the days in which it originally bought Gillette, which was in the early 90s. For P&G, they had the cost basis of when they bought Gillette on the assets. So, it worked out for both firms. And [Buffett] even said that this probably would not have happened if there weren't for the tax advantages that both firms were dealing with with the exchange.

That said, he said that if they were to do it absent the deals, the price would have been significantly different because, again, it is a declining business. Sure, it throws off good cash flow; sure, it has a great brand associated with it. But over the long run, it is probably not as high growth of a business as maybe the pricing would imply.

Glaser: Finally, there was a bit of a hint that Berkshire would be open to potentially taking on debt, particularly at these rates, if they saw an enormous acquisition that they just needed more capital for. Do you think there really is the prospect of something like this happening--that they would try to ingest a deal that large?

Warren: If you look at where the cash balances are sitting right now, they've got about $63 billion in total cash on the books. You strip out $20 billion for the insurance operations, you strip out probably another $5 billion for the operating cash for the other businesses, and that still leaves you with somewhere in the neighborhood of $40 billion in excess cash. I find it hard to think of something larger than that that they'd be willing to take on. I still think they are looking for something in the $5-billion to $30-billion range. They would probably more likely just like to do that with cash on hand.

That said, interest rates are at extremely low levels. And if you can take on debt over 10 or 15 years and be able to push out the payment on that, then you should do it. They really don't have a whole lot of debt on their books from a corporate level, so they can obviously do it. They did some of that with the Burlington Northern deal, so I wouldn't be surprised.

Glaser: Gregg, thanks for joining me today.

Warren: Thanks for having me.